New Law Takes Aim At Retirement Savings; Is The Levee Breaking?

On July 1, 2016, as the new fiscal year kicked off, so did hundreds of new Maryland laws - more than 205 of them according to The Baltimore Sun. Flowing in this sea of new legislation is a law that targets the nearly one million Maryland resident workers who were previously without access to an employer-sponsored retirement savings plan. The goal of the new law, The Maryland Small Business Retirement Savings Program and Trust, is simple: to improve the retirement savings of Maryland workers by encouraging their employers to set up automatic retirement savings arrangements, or to use the new Maryland state-run IRA program. This legislation follows a string of state laws all designed to increase retirement savings of workers in small businesses. The first state to pass such legislation was Illinois, when it enacted the Illinois Secure Choice Savings Program in 2015. The roll-out of that plan is ongoing as it does not become effective until 2017. Maryland’s law is important because it demonstrates a trend at the state and federal government levels to improve retirement savings by automating and mandating retirement savings.

The new Maryland law is different in several ways. First, it established the Maryland Small Business Retirement Savings Board to oversee the program. Additionally, the law authorized the creation of a state-run IRA, which will be administered by a private company with oversight from the Board. As such, most of the details surrounding the IRAs’ fees, investment options, and distributions remain undetermined at this point. However, not everyone will be eligible for the new Maryland IRA program. Workers already covered by an ERISA or other federal retirement savings plan at their workplace will not be eligible. Secondly, an employer must use some type of payroll deduction system or service. The law does not mandate any employer to allow its employees to participate, nor does it require any contributions or funding from the employer. It also states that the employer is not a fiduciary and does not take on any additional liability under the new plan. Instead, the law merely enables employers to automatically enroll their employees in the state-run IRA program. Employees may voluntarily opt out of the program.

Shutterstock- City Hall Baltimore Maryland

While Maryland’s law does follow in the footsteps of the Illinois law, and to some degree the federally sponsored myRA program, it also diverges at certain points to entice employers to participate. According to Peter Gulia, Esq., a lawyer who advises retirement plan fiduciaries, the biggest difference is that the new Maryland law “uses a carrot instead of a stick.” Maryland waives an annual business report filing fee of $300 for a business entity that complies with the new legislation. So, the new law really gives businesses in Maryland an incentive to comply with the new law, as it will presumably save the company money.

With the success of automatic enrollment in 401(k)s and mentions of a federal auto-IRA program by President Obama, it is not a total surprise that a state was willing to implement such legislation in an attempt to improve theretirementsecurityof Americans. The baby boomers do not have enough money saved for retirement, Social Security’s future is murky and will not look the same in 20 years, and most employers are not offering traditional retirement pensions anymore. However, each state run IRA program prompting automatic enrollment creeps further and further towards a system of mandated retirement savings through state or federal IRAs. Is this a sign of the levee breaking? Should we expect federal or state mandated retirement savings next? In some ways we already have this with Social Security, but with so many Americans financially unprepared for retirement, there is swelling momentum for the establishment of mandatory retirement savings programs or, at a minimum, automatic enrollment programs.